Wheatley Review on Resetting Libor

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On 28 September 2012, the Wheatley Review of Libor: final report was published and a ten-point plan to reform the ailing benchmark is on the cards. See earlier posts on Libor on this blog here and here. Moreover, responses to the initial discussion paper are available here, here and here. The treasury has explained that the government is studying the review’s recommendations and intends to respond to the review by introducing “any necessary legislation” in the Financial Services Bill currently under consideration by the House of Lords.

The threefold terms of reference for the review included (1) reforming the current framework for setting and governing Libor (2) determining the adequacy and scope of sanctions to appropriately tackle Libor abuse and (3) whether similar considerations apply with respect to other price-setting mechanisms in financial markets.

Prior to giving Wheatley the platform to make his “pushing the reset button” speech, the Financial Secretary to the Treasury, Greg Clark MP made clear that (a) there was no doubt that a fundamental change in standards is needed (b) self-regulation of Libor was a disaster (the claim that the coalition government was “cleaning up the mess created by the failed regulatory system that we inherited” was also advanced!) and (c) there was a need for immediate action.

Indicating the global nature of the crisis by saying that it “was not a London issue”, Wheatley emphasised that in resetting Libor individuals needed to act with integrity so that probity could be restored in the benchmark and he explained that:

[P]ressing reset is not as simple as pushing a button. Today I am publishing a 10-point plan for extensive and lasting reform of a broken system to restore the trust that has been lost. Libor needs to get back to doing what it is supposed to do, rather than what unscrupulous traders and individuals in banks wanted it to do.

But Wheatley did not think that Libor was beyond reform, it was indeed salvageable, and his recommendations underscored three areas:

Regulation – Introducing a new regulatory structure for Libor, including criminal sanctions for those who attempt to manipulate it.

The rate itself – A range of technical changes to make the system work better, including streamlining a lot of the currencies and maturities currently used.

Noting Libor’s centrality as a reference price for more than $300 trillion worth of loans and transactions globally, Wheatley explained that the main areas of concern were the deep failures in the manner Libor submissions are made, how the benchmark was governed and policed. The way Libor submissions were made – for example, the way traders overstated or understated figures to maximise profits – meant that “too many people had a vested interest in gaming the system.” And the lack of external accountability and oversight only made matters worse.

The ten points can be extracted from pages 8 – 9 of the final report as:

Regulation of Libor

(1) The authorities should introduce statutory regulation of administration of, and submission to, Libor, including an Approved Persons regime, to provide the assurance of credible independent supervision, oversight and enforcement, both civil and criminal (see Chapter 2: Regulation and sanctions).

Institutional reform

(2) The BBA should transfer responsibility for Libor to a new administrator, who will be responsible for compiling and distributing the rate, as well as providing credible internal governance and oversight. This should be achieved through a tender process to be run by an independent committee convened by the regulatory authorities (see Chapter 3: Strengthening institutions and governance paragraphs (3.5 to 3.16).

(3) The new administrator should fulfil specific obligations as part of its governance and oversight of the rate, having due regard to transparency and fair and nondiscriminatory access to the benchmark. These obligations will include surveillance and scrutiny of submissions, publication of a statistical digest of rate submissions, and periodic reviews addressing the issue of whether Libor continues to meet market needs effectively and credibly (see paragraphs 3.17 to 3.38).

The rules governing Libor

(4) Submitting banks should immediately look to comply with the submission

guidelines presented in this report, making explicit and clear use of transaction data to corroborate their submissions (see paragraphs 4.5 to 4.13).

(5) The new administrator should, as a priority, introduce a code of conduct for submitters that should clearly define:

guidelines for the explicit use of transaction data to determine submissions;

(6) The BBA and should cease the compilation and publication of Libor for those currencies and tenors for which there is insufficient trade data to corroborate submissions, immediately engaging in consultation with users and submitters to plan and implement a phased removal of these rates (see Chapter 5, paragraphs 5.3 to 5.13).

(7) The BBA should publish individual Libor submissions after 3 months to reduce the potential for submitters to attempt manipulation, and to reduce any potential interpretation of submissions as a signal of creditworthiness (see paragraphs 5.14 to 5.18).

(8) Banks, including those not currently submitting to Libor, should be encouraged to participate as widely as possible in the Libor compilation process, including, if necessary, through new powers of regulatory compulsion (see paragraphs 5.19 to 5.28).

(9) Market participants using Libor should be encouraged to consider and evaluate their use of Libor, including the a consideration of whether Libor is the most appropriate benchmark for the transactions that they undertake, and whether standard contracts contain adequate contingency provisions covering the event of Libor not being produced (see paragraphs 5.29 to 5.39).

International co-ordination

(10) The UK authorities should work closely with the European and international community and contribute fully to the debate on the long-term future of Libor and other global benchmarks, establishing and promoting clear principles for effective global benchmarks (see Chapters 6, Alterntaives to Libor for the longer term and 7, Implications for other benchmarks).

In addition to using FSMA to allow prosecutions for manipulation and attempted manipulation, Wheatley also recommended that in future Libor’s submission and administration should be regulated by the FSA. Equally, the key individuals involved in Libor’s processes should be approved by the FSA.

Inevitably, transferring Libor’s submission and administration under the FSA’s regulatory umbrella will enhance the authority’s ability to protect the benchmark’s integrity, supervise the conduct of everyone involved and take regulatory action against those involved in misconduct.

The review’s final report, which is worth reading in full, is available below:

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